The Welfare Effects of Complementary Bidding Mechanisms : An Application to Electricity Markets

I study the welfare effects of “complex bids”, a complementarity bidding mechanism used in wholesale electricity auctions. Complex bids allow companies to explicitly link their valuations across different hours of the day. Allowing for greater flexibility has the potential of improving the efficiency in the market, but it gives bidders an additional dimension to exert market power. I develop a model of complex bidding and present a new strategy to estimate the model fundamentals, including dynamic costs of operation. I then compare the original mechanism to one in which complex bids are not allowed. I find that the positive benefits of the mechanism dominate. Removing complex bids could potentially increase the payments in the market by 4.94% and overall costs by 1.13%. JEL: L13, L94, D44.

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